Stablecoins: A New Payment Infrastructure – David Birch [Season 3 | Episode #03]

Shaun Ferrari 00:00:33 Hello everybody! Welcome to the next episode of The Pit Exchange, where we talk about the latest in payments innovation and technology. I’m your host this week at Currency Research, Shaun Ferrari, and I am thrilled to be joined by David Birch. David, I don’t think you need much introduction, but it would. I think everyone in the payment space knows of you for sure, but I’d love to have you offer our audience a quick a quick intro.

David Birch 00:01:03 It’s a very kind introduction, Shaun. Thank you. so I’m Dave Birch. I’m an author, advisor and commentator on digital financial services. I’m global ambassador for Fime and I’ll be well.

David Birch 00:01:16 I’m looking forward to attending the Istanbul Currency Conference with theme. soon.

Shaun Ferrari 00:01:23 Yeah. Coming up, it’s, We’re we’re thrilled to have you there. it’s the it’s in Istanbul, the 23rd of March. So we’re we’re thrilled to have you. Have you have you there? Yeah. We’re, got a lot of central banks on board for this edition of the central Bank Payments Conference. It’s actually the, the 10th anniversary of the event. So we’re, It’s hard to believe it’s been ten years since I actually joined that currency research. and, coincidentally, had started this this event. so, anyway, thrilled to have you there. Looking forward to it. Looking forward to seeing everybody there. We we thought today maybe we would talk a little bit about I mean, there’s so much going on in payments, but we’d start talking about stablecoin a little bit and and what’s going on, how you’re thinking about stablecoin. I’ve seen some some videos you’ve posted online and some work you’ve done on it recently. But, what should we know about stablecoin these days?

David Birch 00:02:16 Let’s start with a little bit of a little bit of context.

David Birch 00:02:20 So we’re changing from one kind of economy to another kind of economy. And I don’t think that’s controversial to say that. And essentially there’s a problem, because we’re using the money of the old economy to support the new products and services of the new economy. And it’s not working very well since, you know, the government doesn’t provide the kind of money that you need to grow products and services in the new economy. The private sector has stepped in to create the money itself. And because that money is popular with people. Its use has already become quite widespread. So what you see is a growing use of private sector money in real transactions. You know, you know, people buying real goods and services, not just, not just, trading money. so you see real goods and services being bought using this private money and. Well, this is England in 1787. This is exactly what happened. You know, the the transition from, a pre-industrial to an industrial economy meant there was a demand for new kinds of transactions, in particular money, wages.

David Birch 00:03:52 There wasn’t the money in circulation to support that. The money that was in circulation was very poor quality silver, which was much tripped and abused. You had people moving to the cities that meant factories needed to spend. A factory owners had to spend a good part of their week scrabbling around to try and find the money they needed to pay the workers. you had retailers an entirely new kind of business. You had retailers opening up in these cities, and they needed to be paid, and there was no money in circulation to pay them. The smallest note that was produced was by the Bank of England. I think it was £5, which was like, I don’t know, £1 million in today’s money. I mean, I don’t know, but the point is you couldn’t use £5 notes to. So the technology of the new economy, manufacturing was used to create these new kinds of money. And people began by taking copper. It these, these coins were often called druids, actually, because the, the copper to produce these new coins came from Anglesey in Wales, which was the the last redoubt of the Druids before they were mercilessly slaughtered by the Romans.

David Birch 00:05:05 So people would take this copper and they would go take it to places like Birmingham, where the new manufacturing companies were springing up, and they would turn the copper into copper coins. And in fact, just to illustrate the point, here, here, in fact, I’m showing I know this is great podcasting, but I’m showing you I’m showing you a copper druid penny from 1787. I have it in my hand here.

Shaun Ferrari 00:05:30 There you go. Yes.

David Birch 00:05:33 and I said a couple of interesting effects because the companies that were producing these would compete to produce better quality money, because the money itself was an was an advertisement for their technological prowess. So you wanted to show what a great manufacturer you were by manufacturing great money, and you’d use this money to pay your workers, and the workers would use it to buy things in shops. The money circulating and the economy benefited and started to grow. Now, of course, we don’t use pennies that are minted by private companies anymore. Part of anything else? No private company would mint a penny because it costs twopence to mint it.

David Birch 00:06:13 So I mean, no one would bother. But if that’s something, aren’t they stopping doing pennies in the US at the moment they are.

Shaun Ferrari 00:06:19 It’s a that’s a whole other podcast. But yes, the penny is stopped here in the US finally.

David Birch 00:06:24 but what in fact happened was, I mean, I’m compressing a much more interesting story, but essentially the government, once the government saw that this new way of making money, i.e., you know, with steam and presses and not horses and things anymore, once they saw that this worked, for a variety of reasons, including capture of Seigniorage, they decided to step in and do it themselves. So, you know, after a few years, eventually they made the issue of private money illegal, and the mint took over the creation of the the pennies and the tablet and so on. So, you know, if that analogy tells us anything, which I think it does, is that there was an absolute revolution in banking and finance. But there was you you had these successful companies.

David Birch 00:07:20 These successful companies were in cities. They needed supply chains. They needed to play suppliers, the suppliers needed to play. You had an entirely new kind of set of financial transactions, which hadn’t existed in the pre-industrial economy. And you needed new kinds of institutions to like you needed the pennies and the tuppence to pay the wages and to do the shops to get the economy going. But you also needed new kinds of institutions. And so you got the birth of, of the country banks. And, you know, the big cities all had had their own big banks. So when eventually the stablecoins went away and the government took over the money, the institutions remained and they were the, you know, the critical, you know, the explosion of Victorian capitalism, which. Which greatly enriched, everybody. So, so, so if that means anything in the modern era, what it means is, in the long run, I’m unconvinced that stablecoins really matter that much. They’ll help to get these new businesses off the ground.

David Birch 00:08:29 Are they necessarily the best way of running money? Not obviously true. in time, the government might decide. Actually, it’s much better if there’s one, you know, stable pound that’s backed by central bank reserves. You can have as many pseudo stable pounds banked by fractional reserve banking or, you know, offshore companies or whatever. But there’ll be one that’s backed by central bank reserves and everybody will end up using that because it’s the because it’s the least risk. But the new institutions that stablecoins create form the basis of the next generation of financial market infrastructure. Now that that sounds like a big statement, but I actually think it’s not that controversial. If you look at what the serious money people are saying, let the Larry thinks of the world. They want tokenization as soon as possible. They want everything tokenized and they want on chain, essentially transactions. The reason they want stablecoins is so you can do away with clearing and settlement of chain. But once all of those digital assets are on chain, then the need for the stablecoins begins to vanish.

David Birch 00:09:43 Because you have these baskets of digital assets that you can use to support commercial transactions instead. So that that’s my that’s my sort of central point about this. Like, why are companies like Google and Stripe and people spending so much money building these new blockchains because they want to offer stablecoins, but they don’t want to do it on Bitcoin or Ethereum or something like that. It’s not much good at being a 21st century factory owner trying to pay your suppliers in Timbuktu, when all of a sudden everyone’s playing CryptoKitties and nothing goes through the system. That’s not very good. And, you know, paying your suppliers using Bitcoin. Well, nobody does. So clearly that doesn’t work. So why not just use stablecoins on those existing? Because those networks were never built for commercial payments. They they have different design goals to do with censorship resistance, which actually nobody in the real world cares about. So.

Shaun Ferrari 00:10:45 So do you think the I mean, looking at how it how the system is evolving and I think you’re right.

Shaun Ferrari 00:10:50 I mean that the analogy of coming from, you know, the originally the Yap stone and the pennies, banknotes checks all the way through. Now we’ve got these these new new digital asset. Digital token type payments. Do you think is it. Is it these new institutions, as you put it, that are developing the stablecoins that will form the kind of the the new transmission channels of the the new economy? Or is it the commercial banks that will develop things like deposit tokens and, and their version of this that will, that will kind of run. Where are the banks? I guess my question.

Speaker 4 00:11:28 No, no, I mean, I think.

David Birch 00:11:29 I think that, I think there’s it’s actually a complicated question. I think, you know, to answer it, there’s, there’s sort of two different parts to the answer. So the first is why, you know, if you’re building a network like you’re Google or somewhere, you’re building a new blockchain that people can use to send stablecoins backwards and forwards.

David Birch 00:11:52 Well, once that works, I mean, they’re just tokens. So once that works for stablecoins, it works for any other tokens and you can tokenize anything else you want. Once those rails are laid down, you can use them for generalized digital asset, which I’m personally convinced is what they’re long term business models around audiences. So. So there’s the rails, you know, which are being built now to move the tokens around. I think that’s slightly different from the financial services that will be offered on those rails. So so when you say bank in my horrible nerd, through my horrible nerd prism, that means one thing, which is credit. You know, banks are things that provide credit, and there’s no obvious reason why, if there’s no obvious reason why they should own the payment rails now. I mean, that’s partly a historical accident, but there’s certainly no obvious reason why banks should own those roles in the future. And in fact, the separation of banking and payments is what people talk about when they talk about creating narrow banks to do the payments.

David Birch 00:12:59 The separation of fractional reserve and narrow banking actually might be a very good thing. That kind of unbundling could be a more efficient way of running the economy. So the people that specialize in credit will do that, and other people who specialize in payments will do that. And it could be that some huge enterprises like JP Morgan can do both. But I don’t know, maybe they’re different businesses. Yeah.

Shaun Ferrari 00:13:27 So interesting. Yeah. Yeah. And then as the, I guess, working up channel, you’ve of course got the, the central bank’s piece of this and, and you kind of I think going, working through your analogy again, you know, at some point the central bank came in and said, all right, this is the currency that we will be using in this particular country. Now of course, stablecoin doesn’t necessarily have country bounds. So that’s a different world and a different.

Speaker 4 00:13:55 No, no I, I accept that. But I think I think that that’s a that’s a that’s a.

David Birch 00:13:58 Perfectly valid point, on it, but it’s a slightly separate point.

David Birch 00:14:01 So, you know, if the if the, Bolivian government implements a digital Bolivar, nobody will use it because they want dollars, you know, so it doesn’t make. That’s, that’s not quite the same thing as having a digital euro or a digital pound. So I think that’s that’s an important point to make. But if you are going to create I mean, this is what I was talking about earlier on, if you are going to create a central bank digital currency, actually it has slightly different goals. It has slightly different aims because the central bank digital currency, you have issues doing national resilience, financial inclusion, you know, certain kinds of permissionless innovation. Like it’s not quite the same thing, say, stablecoins when they’re not about cryptocurrency trading, tax evasion, ransomware and all these other kinds of things. What they are about is paying. Transferring value from one place to another. And, CBDCs are about more than that. They have social goals that go with the, you know, go with the financial goals, I think.

David Birch 00:15:11 And one of them that I’ve mentioned more than once is, you know, CBDCs need to be able to work offline. If the power goes out, the mobile network goes down. You still need to be able to, you know, go and buy some milk around the corner.

Shaun Ferrari 00:15:28 Yeah. No, for sure, I think I think that’s what’s interesting about all these different payment systems. We often conflate oh, CB CBDC stablecoin deposit token Bitcoin into this universe of things. But they’re all they are all very different with, as you say, different goals, different functionalities, different uses.

Speaker 4 00:15:51 And I think that I think there’s a very specific.

David Birch 00:15:53 Problem of jumbling up crypto, you know, I mean, you know.

Speaker 4 00:15:58 A.

David Birch 00:15:59 Digital currency, a central bank. Digital currency, a cryptocurrency, a digital. These are all very different things that have different, you know, different roles to play in the financial ecosystem and, and have different implications downstream. I think the general if you look at something like the BIS, for example, their general picture of this idea of the internet, where basically you’ve got digital assets being traded over, you know, some kind of blockchain, and these blockchains are somehow bridged in a way that makes sense.

David Birch 00:16:34 You know, I don’t think that’s I don’t think that’s particularly controversial anymore. I think I think digital assets are the heart of next generation. And I think stablecoins take us in that direction. Do they mean that we don’t need CBDCs? I think not. I think we do need CBDCs because they’re a different beast with different purposes, different goals.

Shaun Ferrari 00:16:55 Yeah. And where do you think? I mean, because we we haven’t mentioned, well, I mean, you did mention cash and coin, but do you? What’s your crystal? It’s a crystal ball question, right? I guess. Do you see if CBDC stablecoins really take off? what’s the future for? For paper currency? is it replaced or is it still around?

David Birch 00:17:20 That’s one of the things I’m curious to ask people about at the conference, Shaun, because my personal view is that cash is going to atrophy. And it’s a it’s a view that was that was expressed very well. The the Canadian author William Gibson, who wrote about The Matrix and say, you know, I absolutely love his stuff.

David Birch 00:17:37 And many, many years ago, I read his book, Count Zero and it’s in the future. And he talks about he says it wasn’t actually illegal to have cash. It’s just that nobody ever did anything legal with it. So it’s like it just becomes something that, you know, just doesn’t occur in polite society anymore. It doesn’t get banned or anything. It just it just kind of atrophies it just because all the things that you want to do, it’s less convenient to do it using cash. Except for one thing, which is crime. And, you know, it’s not obvious that central bank should carry on subsidizing criminals by producing high value banknotes. but anyway, as I say, that’s the thing I’m genuinely keen to learn more about at the event. I, I want to pick up some sentiment there.

Shaun Ferrari 00:18:28 Yeah. I mean, I think it’s interesting and we ask, obviously we we have a foot on both sides of this as we we talked to a lot of folks and have a lot of supporters on the cash side as well as on the payment side.

Shaun Ferrari 00:18:37 And I think it is interesting to get into those discussions. And as we’ve we’ve talked to some different central banks about it, where you are in the world, I think, you know, matters a lot on this. When you talk to the a lot of the African central banks or some of the developing world central banks, their cash use and stuff is still growing rapidly and so forth, and they’re like, it’s going to be not that they’re saying it won’t go away until your point. Maybe at some point it atrophies, in different countries get there at different times, but there’s definitely some. It seems that there’s some places that are a long way off from that. and there are some places that are closer, but that’s again.

David Birch 00:19:12 No, I know it’s I know it’s a controversial topic. And, you know, I’m looking forward to discussing it at the event, but as I say, I’m, I’m curious about this to learn to see what other people’s feelings are about it. Now, now that they’ve seen, you know, the use of stablecoins begin to grow now that they’ve seen, you know, the big starts of the interlinking of national instant payment networks, now that they’ve seen, you know, digital wallets and all this kind of stuff, I’m curious to see what they think about it.

Shaun Ferrari 00:19:44 Yeah, interesting. You brought up the the interlinking and the, the instant payment networks, really kind of taking off over this, this past year or where that is, I think that does add another variable into this whole. Not that it supplants stablecoins because there are different uses, but at the same time, it’s an interesting additional development of okay, well, there is this new, faster way to pay. Of course, that is also traditional commerce, right? Just moving faster. so I don’t know, just another another interesting angle to think about.

David Birch 00:20:23 It is.

Shaun Ferrari 00:20:23 Interesting and, cool. So what? I guess one last question. again, back on the back on the the stablecoin piece, I think, I mean, you kind of mentioned in, in the analogy of, of things going to from the many to one, right. If we’re, if we’re you’re kind of you have different different coins that are out there in this case different stablecoins, different companies. do you think it will take kind of regulation to push things to a a common stablecoin environment eventually, or is it the market just working its way through and and eventually, you know, those that have a larger market share, different features, what have you, kind of push their way forward or what’s the next development kind of down that.

David Birch 00:21:16 It’s different, different features is an interesting point because we haven’t really seen that yet. So at the moment, you know, that we, we, you know, the, the sort of digital dollar and you know, Dogecoin and you know, they they all kind of basically work the same way their tokens moving around on there. But it’s plausible that people could look at different kinds of functionality. For example, you might imagine, you know, certain kinds of coins having more privacy built into them or or more resilience or, you know, the ability to work offline or something like that. So I think we haven’t seen the more functionality yet, but that’s certainly credible. I think all other things being equal, what you’d expect is that you’ll get the dollar will have the lion’s share. Because it does. You’ll have a next set of sort of working currencies. You know, the pound and the Swiss franc and the Swedish krona and so on, which will be kind of widely used. And then I think it’s a struggle for other currencies.

David Birch 00:22:15 I think they they run the risk of being permeated by. I mean, I in my book The Currency Cold War, I drew it as a pyramid. You know, you could imagine there’s a lot of pressure from the top of the pyramid down onto the other. the other ones below. And certainly I think it’s a legitimate fear from their point of view, which is, you know, what’s the point of being the finance minister of rural India? If everybody uses dollars, you know, what are you what actually are you in charge of? You know, you’re not in charge of the interest rate. You’re not in charge of the money supply. It’s a legitimate fear. Yeah.

Shaun Ferrari 00:22:51 Yeah, yeah. Awesome. Well, I think, you know, the one thing that’s clear in all these discussions is that there’s there’s a lot to talk about. Yeah. Okay, fine. I’ll talk about it. Yeah. Yeah. Awesome. Well, thank you for taking some time and chatting with us. And, we definitely look forward to seeing you, in, in Istanbul and delving into these topics more.

Shaun Ferrari 00:23:13 But thanks for taking some time.

David Birch 00:23:14 So looking forward to it. Shaun. I’ll see you there.

Shaun Ferrari 00:23:18 All right. Well, thanks everybody, for for listening. again, if you if you’d like to come chat with Dave or any of us about the payments topics upcoming, we hope to see you in Istanbul at the middle to end of March on the 23rd. but until then, give us a listen the next time, and we look forward to sharing some more innovations on the exchange with you. So take care and talk to you all soon.